You are considering two investments, a conventional, FDIC insured 1-year bank CD

Question

You are considering two investments, a conventional, FDIC insured 1-year bank CD with an interest rate of 5% and a 1-year “Inflation Plus” CD offering 1.5% plus the rate of inflation, which is also FDIC insured.

a.   Which investment is safer?

b.   If you expect inflation to be 3% over the coming year, which investment would be better? Explain.

c.   If we observe a nominal risk free rate of 5% and a real rate of 1.5% on inflation-indexed bonds, can we infer that the markets expected rate of inflation is approximately 3.5%?

Explanation / Answer

a)we can not say as it difficult to predict inflation in coming year.

b) investment 1:5% anvestment 2=1.5%+3=4.5% so the return is more for investment one and we should go for it

c)Yes we can infer it as

nominal rate+real rate+inflation

Related Questions

Navigate

• Browse (All)
• Browse Y
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.